What happens when a party to a written and signed commercial agreement claims that the document does not reflect the negotiated bargain? The Ontario Court of Appeal considered the circumstances under which the agreement may be corrected by way of rectification in McLean v McLean.1 The case involved a messy dispute within a family, but may have broader implications for commercial transactions generally.
The case concerned the sale of a dairy farm in 1989. A mother and father sold their farm to their son and soon-to-be daughter-in-law. They discussed how the sale would proceed based on fair market value of the business, and had a valuation carried out. The parties signed a memorandum of agreement ("Agreement") to memorialize the deal. However, the consideration recorded on the Agreement was $115,000 less than what was set out in the valuation. The mother discovered this discrepancy in 2008 in the context of a separation between her son and daughter-in-law. She brought a claim for rectification against them both, seeking to add $115,000 to the total purchase price of the property. The son did not oppose the claim, but the daughter-in-law did.
Decision at the Superior Court
The trial judge found that the parties agreed that the fair market value of all of the assets that were included in the deal was $733,255. However, he accepted evidence from the daughter-in-law that she believed the final price agreed upon was $625,000. That figure was close to the price written on the Agreement. The trial judge held that since both parties had a different understanding of the final purchase price, the common intentions of the parties could not properly be determined. The mother's claim for rectification was therefore dismissed. She appealed.
Clarifying the Test for Rectification
At the Court of Appeal, neither party offered any case that considered how the common intention of the parties was to be established in a claim for rectification. The appellant referred the court to law on contractual interpretation where rectification was not involved. In those cases, the intention of the parties was to be construed based on the language of the contract as a whole, the factual matrix underlying the contract, and the need to avoid commercial absurdity. In no event, however, did the court consider the subjective intention of the parties. In other words, when determining how the words in a contract ought to be interpreted, evidence as to what the parties thought the words meant was irrelevant.
The Court of Appeal reviewed the authorities on the doctrine of rectification and set out its own test as to how to go about determining, in cases where rectification was sought, whether parties had a common intention prior to signing the contract. The inquiry should consider whether the totality of the evidence supports the conclusion that an agreement was in place, but that an error was made in recording it.
Writing for the Court, Justice of Appeal Weiler held that the totality of the evidence, while including the entire factual matrix present when the contract was entered into, also included the testimony of the parties as to what they understood the terms of the agreement to be. However, the weight to be accorded to this evidence would vary depending on the documentary and other evidence available.
The Court held that the trial judge's exclusive reliance on the daughter-in-law's testimony when determining whether there was a common intention between the parties was inappropriate. The factual matrix, including an appraisal, a draft schedule to the Agreement, and an application form for a government assistance program available to farmers, also ought to have been considered by the trial judge.
Having examined all evidence in the factual matrix, the Court of Appeal found that an objective observer would have concluded that the common intention of the parties was to agree to a purchase and sale at the fair market value of $733,255. The omission of this total from the final purchase and sale was a mistake and the Court ordered it to be rectified.
This case has significant implications for commercial dealings reduced to writing. First and foremost, the case serves as a reminder that while a written contract generally offers excellent evidence of the bargain parties have agreed to, there are circumstances where a party cannot rely on the document even for a term so fundamental as the purchase price. If one of the parties to a written contract cries "mistake," the potential exists for a protracted legal battle, particularly where other documentary evidence supports the claim for rectification.
Second, the inclusion of "subjective intentions" of the parties as a factor in the analysis of the terms of the deal broadens the scope of oral and documentary evidence that is relevant and producible in a claim for rectification as compared to a dispute over the interpretation of terms in a contract.
In any event, it is apparent that even where parties reduce their agreement to writing, the potential exists for the terms of the deal, as expressed in the written contract, to be revisited. It goes without say that the deal documents should be carefully reviewed to ensure that they express what the parties intended. Parties should also consider, however, having the recitals to an agreement provide some indication as to how key terms were arrived so as to further memorialize the intention of the parties should any dispute arise down the road.
1. Mclean v Mclean 2013 ONCA 788 at paras 12, 17, 18,19.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014